‘The last thing the property market needs is more uncertainty’

A year ago the Central Bank of Ireland announced new mortgage restrictions. How have the rules affected the property market – and will they change again?

The Central Bank of Ireland ended its tortuous, decades- long journey from basket case to best case just a couple of weeks ago, when it won what must rank among the least glamorous awards ever created: it was named world central bank of the year by an international panel of former central-bank governors.

In making their decision the ex-governors noted the Central Bank’s newfound “authority and integrity”. They also cited the introduction of strict residential-mortgage lending rules, 12 months ago, as a key reason why the bankers on Dame Street got the nod.

Those rules have not just been to the fore of great minds gathered around highly polished boardroom tables in Frankfurt, London and Washington, DC. They have also been quite the talking point at home, after making the homeownership dream almost impossible, at least in the short term, for thousands of people.

The rules prohibit banks from lending more than 80 per cent of a home’s purchase price to most second-time buyers – even those with impeccable credit histories and an ability to pay more. They also require first-timers to cobble together a deposit of 10 per cent on the first €220,000 and 20 per cent of the balance, and they limit mortgages to 3.5 times gross income for all borrowers.

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The rules were introduced to stop another property bubble inflating. Although they were not universally welcomed, most people agreed that something needed to be done to put manners on a property market that had begun to reheat in a way dangerously reminiscent of the boomiest times.

In 2014 residential-property prices jumped by more than 16 per cent. The spikes recorded in some of the leafier enclaves of Dublin were well in excess of 20 per cent.

For the Central Bank to have done nothing would have been a hideous reminder of its light-touch regulation during the bubble years. Such an approach would certainly not have won it any “world’s best” gongs.

On the surface the new rules appear to have worked. Nationwide, residential-property prices increased by just 6.6 per cent in the 12 months to the end of December. This compares with 16.3 per cent in the 12 months to December 2014. In Dublin, residential-property prices were 2.6 per cent higher than they were a year ago.

Approvals down

The Banking & Payments Federation said this week that 8,103 mortgages were drawn down in the fourth quarter of 2015, which is 6.9 per cent more than a year earlier but a considerable slowdown compared with the 44 per cent year-on-year increase seen during the first half of 2015 – which is to say before the rules came into effect.

The Irish Brokers Association says that the figures show a slow recovery in the mortgage market but has called on the Central Bank to reconsider its rules. “The mortgage market is fluid and so too should the rules pertaining to it be,” says the association’s chief executive, Ciaran Phelan.

As well as first-time buyers being “hit hard, the problems these rules have caused for those looking to trade up should not be overshadowed”. He points out that many people who bought in the boom are now in negative equity. “It’s unlikely that a high percentage of these people could get a 20 per cent deposit together.”

Karl Deeter, a mortgage broker and keen observer of the property market, has written an extensive report on Dublin’s boom-and-bust cycles spanning 300 years. He is not one of the Central Bank’s cheerleaders, and he is unconvinced that the 2015 scheme deserves much credit.

“I don’t think the new rules have had any real impact on the house market despite how it might be characterised,” he says.

Deeter points to an International Monetary Fund study of six countries that introduced lending restrictions. The report indicated that the rules made little difference, he says.

“In the credit market the rules have caused a fair bit of chaos. But I think prices were going to slow down anyway. We are in the middle of a property cycle, and cycles such as this have always slowed down in the middle, after which prices started to ramp up again. They haven’t started ramping up yet, but they will.

“The truth is that we don’t do good regulation in this country – and never have,” Deeter says. “So maybe the fact that the Central Bank brought out any rules is worth celebrating. Maybe it does show that the regulator, while still unwilling to bite, is at least willing to growl.” But, he says, the rules have not fixed and will not fix the property market: “We will still have booms and busts.”

Doubt about regulations

Angela Keegan of the

Irish Times

-owned property website Myhome.ie is less scathing of the Central Bank’s role. Still, she is not convinced that the tighter lending regulations have dealt with the problems besetting the housing sector in recent years.

“The new rules have worked in terms of what the Central Bank was looking for: they reined in price increases,” she says. “By limiting what people were able to borrow in a market that was coming close to overheating, it stopped panicked buyers from casually upping bids by €5,000 or €10,000, just because they could not borrow that much any more.”

Keegan says that the double-digit growth of 2014 has been replaced by slow single-digit growth – and “no one can complain about that. We need to get away from thinking that it’s great to see house prices growing by double digits. We know how that ends up now.” According to Keegan, the market is still “in a period of transition” and still getting used to the new rules. She questions the wisdom of the Central Bank’s governor, Prof Philip Lane, in announcing a review of the restrictions but delaying it until July.

Lane, who took over as governor in November, said last month that the new lending regime was here to stay but that the bank was open-minded about varying it as it saw fit. The rules “could be adjusted upwards or downwards. It’s not the case that the Central Bank picked the most severe rules. Those rules can be adjusted, recalibrated.”

Keegan is unconvinced. “Saying he plans to do something in July is not a good idea from the market perspective,” she says. “It adds a degree of uncertainty, and the last thing this market needs is more uncertainty.”